The Ministry of Health decided to put the deregulation of pharmacy ownership on the agenda as part of the reform of the New Zealand health system. This is a very controversial topic and you’ll be familiar with it already unless you’ve avoided talking to other pharmacists, or just lived happily under a rock. We know the arguments that have been voiced so far, and the sentiments invoked by the announcement, and I don’t feel it necessary to repeat them here. But I wanted to address the Ministry’s reasoning (or lack thereof) for going ahead with this idea.
Liberalisation is a big deal for our sector, yet the Ministry’s discussion documents don’t go into a lot of detail as to why they are proposing to change the current ownership rules. They simply say that it’s “not necessary” and that it’s an “anomaly.” In the Pharmacy Action Plan the Ministry proposes to review the existing regulations to create an environment that helps rather than hinders progress. However, it is unclear why the Ministry thinks that deregulation of pharmacy ownership will contribute to this. The Plan states that the drafting of the new legislation will accord with the Treasury’s best-practice principles. One of these principles is that legislation should not “unduly interfere with economic activity.” Perhaps, in the Ministry’s opinion the current rules unduly interfere with economic activity.
It would be great to see more explicitly stated reasons so as to enable a meaningful discussion, but for now we need to look for clues. I found one in one of the discussion documents, where it says that deregulation would enable a competitive market. Perhaps, this is a reference to one of the main arguments that we hear from proponents of deregulation. The argument is that a deregulated market will increase competition resulting in lower prices and better, more accessible services.
The idea is not a new one. In fact, as so eloquently discussed in this paper by Dan Friesner, the original economic theory on which the argument is based is more than a century old and it has long been rejected. This is because for the theory to work we need the conditions for perfect competition to be met, which is next to impossible in real life. One of these conditions, for example, is free market entry for new competitors. In reality, setting up a pharmacy requires a substantial upfront investment, restricting potential entrants to those with deep pockets and good knowledge of the compliance requirements.
Pharmacy ownership has been liberalised in many countries in the past decades, but we are yet to see a study that shows a statistically significant price reduction or positive overall economic impact. I’m not saying it cannot happen, but I couldn’t find any reliable studies, despite the fact that there have been many opportunities to study the effect of deregulation on the market.
Granted, most countries that liberalise pharmacy ownership experience growth in the number of pharmacies, which would suggest an improvement in access to medicines and health services, which would undoubtedly be a positive effect. However, the experience is that new pharmacies tend to open in areas where there is already good coverage. Pharmacies do not tend to crop up in sparsely populated areas, or anywhere where there is the slightest risk of not getting return on the investment. In other words, rural areas where access to health services is limited, aren’t going to benefit from market liberalisation alone.
As this paper by Sabine Vogler states, while liberalisation may lead to increased competition in some areas, it does not necessarily result in the desired positive results. Further, liberalisation may lead to horizontal mergers, larger pharmacy chains, or even vertical mergers with wholesalers, resulting in the distortion of the market. Therefore, the expectations of economic benefits associated with the deregulation of pharmacy ownership cannot be supported with much evidence.
What I’m really missing is a comprehensive policy statement. The Ministry ought to have a good enough reason to liberalise pharmacy ownership, because of the significant impact it may have on the pharmacy sector. I’d like know what, in the Ministry’s view, is the problem that needs to be dealt with? How does liberalisation solve that problem? Does the solution take into account the values and interests of the sector and the community? I’m looking forward to see the exposure drafts of the new Therapeutic Products Bill, which may, or may not provide the rationale of this proposal.
